iLembe District Municipality Fixed Assets Policy
FIXED ASSETS MANAGEMENT
POLICY
INDEX
Page No.
- BACKGROUND OF THE POLICY4
- DEFINITIONS4
- ROLE OF THE MUNICIPAL MANAGER6
- ROLE OF THE CHIEF FINANCIAL OFFICER6
- FORMAT OF THE FIXED ASSET REGISTER6
- CLASSIFICATION OF FIXED ASSETS8
- RECOGNITION OF FIXED ASSETS9
- MEASUREMENT AT RECOGNITION9
- MEASUREMENT AFTER RECOGNITION 10
- SAFE KEEPING OF ASSETS 11
- GENERAL MAINTENANCE OF FIXED ASSETS 11
- IDENTIFICATION OF FIXED ASSETS 11
- CAPITALISATION CRITERIA: REINSTATEMENT,
MAINTENANCE AND OTHER EXPENSES 12
- MAINTENANCE PLANS 13
- DEFERRED MAINTENANCE 14
- DEPRECIATION OF FIXED ASSETS 14
- RATE OF DEPRECIATION 16
- METHOD OF DEPRECIATION16
- AMENDMENT OF ASSET LIVES AND DIMINUTION
IN THE VALUE OF FIXED ASSETS16
- ALTERNATIVE METHODS OF DEPRECIATION IN
SPECIFIC INSTANCES17
- REVALUATION OF FIXED ASSETS18
- VERIFICATION OF FIXED ASSETS20
- ALIENATION OF FIXED ASSETS20
- OTHER WRITE-OFFS OF FIXED ASSETS21
- REPLACEMENT NORMS22
- INSURANCE OF FIXED ASSETS22
- FIXED ASSET LIVES22
- POLICY ADOPTION27
1BACKGROUND OF THE POLICY
This policy is informed by the four Standards of Generally Recognised Accounting Practice (GRAP), the following standards are components of fixed assets i.e.
a)Property, PlantandEquipment, GRAP 17
b)Inventories,GRAP 12
c)InvestmentProperty, GRAP 16 and
d)Impairment of Non-cash generating assets, GRAP 21
2DEFINITIONS
The following terms are used in this Policy with the meaning specified in the relevant GRAP standards mentionedabove:
Carrying amount means the amount at which an asset is recognized after deducting any accumulated depreciation and accumulated impairment losses;
Cost means the amount of cash or cash equivalents paid or the fair value of the other consideration given to acquire an asset at the time of its acquisition or construction.
Depreciable amount meansthe cost of an asset, or other amount substituted for cost, less its residual value;
Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life;
Fair value means the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction;
An impairment loss of a cash-generating asset means the amount by which the carrying amount of an asset exceeds its recoverable amount;
An impairment loss of a non- cash-generating asset means the amount by which the carrying amount of an asset exceeds its recoverable amount;
An inventory for the purpose of this policy means land or buildings held for sale or distribution in the ordinary course of operations;
Investment property means the property (land or a building – or part of a building – orboth) held (by the owner or by the lessee under a finance lease) to earnrentals or for capital appreciation or both, rather than for:
(a) Use in the production or supply of goods or services or foradministrative purposes, or
(b) Sale in the ordinary course of operations.
Net realisablevalue means the estimated selling price in the ordinary course ofoperations less the estimated costs of completion and the estimated costsnecessary to make the sale, exchange or distribution;
Owner-occupied propertymeans property held (by the owner or by the lesseeunder a finance lease) for use in the production or supply of goods orservices or for administrative purposes;
Property, plant and equipment mean tangible items that:
(a) are held for use in the production or supply of goods or services, forrental to others, or for administrative purposes, and
(b) are expected to be used during more than one reporting period;
Recoverable amount means the higher of a cash-generating asset’s net selling price and its value in use;
Recoverable service amount means the higher of a non-cash-generating asset’s fair value less costs to sell and its value in use;
The residual value of an asset means the estimated amount that the Municipality would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life;
Useful life means:
a)the period over which an asset is expected to be available for use by the Municipality, or
b)the number of production or similar units expected to be obtained from the asset by the Municipality;
3ROLE OF THE MUNICIPAL MANAGER
As accounting officer of the Municipality, the Municipal Manager shall be the principal custodian of all the Municipality’s fixed assets, and shall be responsible for ensuring that the fixed asset management policy is scrupulously applied and adhered to.
4ROLE OF THE CHIEF FINANCIAL OFFICER
4.1 The Chief Financial Officer shall be the fixed asset registrar of the Municipality, and shall ensure that a complete, accurate and up-to-date computerised fixed asset register is maintained.
4.2 No amendments, deletions or additions to the fixed asset register shall be made other than by the Chief Financial Officer or by an official acting under the written instruction of the Chief Financial Officer.
5FORMAT OF THE FIXED ASSET REGISTER
5.1 The fixed asset register shall be maintained in the format determined by the Chief Financial Officer, which format shall comply with the requirements of Generally Recognised Accounting Practice (GRAP) and any other accounting requirements which may be prescribed.
5.2 The fixed asset register shall reflect the following information:
a)a brief but meaningful description of each asset.
b)the date on which the asset was acquired or brought into use.
c)the location of the asset.
d)the Department(s) and Vote(s) within which the assets will be used.
e)the title deed number, in the case of fixed property.
f)the stand number, in the case of fixed property.
g)where applicable, the identification number.
h)the original cost, or the revalued amount, or the fair value if no costs are available.
i)the (last) revaluation date of the fixed assets subject to revaluation(where applicable).
j)the revalued value of such fixed assets(where applicable).
k)who did the (last) revaluation(where applicable).
l)accumulated depreciation to date (where applicable).
m)the depreciation charge for the current financial year(where applicable).
n)the carrying value of the asset.
o)the method and rate of depreciation(where applicable).
p)impairment losses incurred during the financial year (and the reversal of such losses, where applicable).
q)the source of financing.
r)the current insurance arrangements.
s)whether the asset is required to perform basic municipal services.
t)whether the asset has been used to secure any debt, and, if so, the nature and duration of such security arrangements.
u)the date on which the asset is disposed of.
v)the disposal price.
w)the date on which the asset is retired from use, if not disposed of.
5.3 All Heads of Department under whose control any fixed asset falls shall promptly provide the Chief Financial Officer in writing with any information required to compile the fixed asset register, and shall promptly advise the Chief Financial Officer in writing of any material change which may occur in respect of such information.
5.4 A fixed asset shall be capitalised, that is, recorded in the fixed assets register, as soon as it is acquired. If the asset is constructed over a period of time, it shall be recorded as work-in-progress until it is available for use, where after it shall be appropriately capitalised as a fixed asset.
5.5 A fixed asset shall remain in the fixed assets register for as long as it is in physical existence. The fact that a fixed asset has been fully depreciated shall not in itself be a reason for writing off such an asset.
6CLASSIFICATION OF FIXED ASSETS
6.1In compliance with the requirements of the National Treasury, the Chief Financial Officer of the Municipality shall ensure that all fixed assets are classified under the following headings in the fixed assets register, and Heads of Departments shall in writing provide the Chief Financial Officer with such information or assistance as is required to compile a proper classification:
6.2PROPERTY, PLANT AND EQUIPMENT
a)land (not held as investment assets).
b)infrastructure assets (assets which are part of a network of similar assets).
c)community assets (resources contributing to the general well-being of the community).
d)heritage assets (culturally significant resources).
e)other assets (ordinary operational resources).
6.3INVENTORY
a)land or building (held for sale).
6.4INVESTMENT PROPERTY
a) land or a building (held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both.
6.5INTANGIBLE ASSETS
a)An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
b)No intangible item shall be recognised as a fixed asset, except that the Chief Financial Officer, acting in strict compliance with the criteria set out in GRAP statements dealing with research and development expenses may recommend to the Council that specific development costs be recognised as fixed assets.
7RECOGNITION OF FIXED ASSETS
7.1The Chief Financial Officer of the Municipality or the delegated person shall ensure that the recognition of property, plant and equipment is accordance with applicable Standard of GRAP. An asset with a minimum value of R3 000 (three thousand rands) shall be recognised as a fixed asset. In addition similar assets of the same sub-category whose individual values, before VAT, are less than R3 000 but cumulatively would exceed R3 000, must be grouped and capitalised under one line item/narration e.g. Total chairs.
7.2No item with an initial cost or fair value of less than R3 000 (three thousand rand) or such other amount as the Council of the Municipality may from time to time determine on the recommendation of the Municipal Manager, shall be recognised as a fixed asset. If the item has a cost or fair value lower than this capitalisation benchmark, it shall be treated as an ordinary operating expense.
7.3Every Head of Department shall, however, ensure that any item with a value in excess of R250 (two hundred and fifty rand), and with an estimated useful life of more than one year, shall be recorded on a stocksheet. Every Head of Department shall moreover ensure that the existence of items recorded on such stocksheet is verified from time to time, and at least once in every financial year, and any amendments which are made to such stocksheets pursuant to such stock verifications shall be retained for audit purposes.
8MEASUREMENT AT RECOGNITION
8.1The Chief Financial Officer or the delegated person shall ensure that an item of property plant and equipment that qualifies for recognition as anasset is measured at its cost.
8.2The cost of an item of Property, plant and equipment is the cash price equivalent at the recognition date
8.3Where an asset is acquired at no cost, or for a nominal cost, the Chief Financial Officer or the delegated person shall assign the cost such asset as its fair value as at the date of acquisition.
8.4The cost of an item of property plant and equipment comprises:
a)its purchase price, including import duties and non-refundablepurchase taxes after deducting trade discounts and rebates
b)any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management, and
c)the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation the municipality incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period
9MEASUREMENT AFTER RECOGNITION
9.1 After recognition as an asset an item of property plant and equipment shall be carried at its cost less any accumulated depreciation and any accumulated impairment losses.
9.2 All fixed assets shall be carried in the fixed asset register, and appropriately recorded in the annual financial statements, at their original cost or fair value less any accumulated depreciation and accumulated impairmentlosses and in terms of the cost model used by the Municipality.
The only exceptions to this rule shall be revalued assets and heritage assets in respect of which no value is recorded in the fixed asset register
10SAFEKEEPING OF FIXED ASSETS
10.1Every Head of Department shall be directly responsible for the physical safekeeping of any fixed asset controlled or used by the Department in question.
10.2 In exercising this responsibility, every Head of Department shall adhere to any written directives issued by the Municipal Manager to the Department in question, or generally to all Departments, in regard to the control of or safekeeping of the Municipality’s fixed assets.
10.3 The CFO or a delegated person by CFO shall issue a the asset control sheet which shall serve as a control register for all moveable assets of the Municipality
10.4 The asset control sheet shall be signed by the responsible officials to confirm the receipt and custody of the list of assets in their offices.
11GENERAL MAINTENANCE OF FIXED ASSETS
Every Head of Department shall be directly responsible for ensuring that all assets are properly maintained in a manner which will ensure that such assets attain their useful operating lives.
12IDENTIFICATION OF FIXED ASSETS
12.1 The Municipal Manager shall ensure that the Municipality maintains a fixed asset identification system (BAUD SYSTEM) which shall be operated in conjunction with its computerised fixed asset register.
12.2 The identification system shall be determined by the Municipal Manager, acting in consultation with the Chief Financial Officer and other Heads of Departments, and shall comply with any legal prescriptions, as well as any recommendations of the Auditor-General as indicated in the Municipality’s audit report(s), and shall be decided upon within the context of the Municipality’s budgetary and human resources.
12.3 All assets that can be tagged should be tagged when they are received, assets without an asset number should not be processed on a financial system
12.4 All infrastructure assets shall be geographically referenced using GIS system, and infrastructure assets should have geographical co ordinates
12.5 All infrastructure assets should be unbundled and the CFO or a person delegated by the CFO should prepare a report of all unbundled assets and identify assets that can be unbundled
12.6Every Head of Department shall ensure that the asset identification system approved for the Municipality is applied in respect of all fixed assets controlled or used by the Department in question.
13CAPITALISATION CRITERIA: REINSTATEMENT, MAINTENANCE AND OTHER EXPENSES
13.1 Only expenses incurred in the enhancement of a fixed asset (in the form of improved or increased services or benefits flowing from the use of such asset) or in the material extension of the useful operating life of a fixed asset shall be capitalised.
13.2 Expenses incurred in the maintenance or reinstatement of a fixed asset shall be considered as operating expenses incurred in ensuring that the useful operating life of the asset concerned is attained, and shall not be capitalised, irrespective of the quantum of the expenses concerned.
14MAINTENANCE PLANS
14.1 Every Head of Department shall ensure that a maintenance plan in respect of every new infrastructure asset with a value of R100 000 (one hundred thousand rand) or more is promptly prepared and submitted to the Council of the Municipality for approval.
14.2 If so directed by the Municipal Manager, the maintenance plan shall be submitted to the Council prior to any approval being granted for the acquisition or construction of the infrastructure asset concerned.
14.3 The Head of Department controlling or using the infrastructure asset in question, shall annually report to the Council, not later than in July, of the extent to which the relevant maintenance plan has been complied with, and of the likely effect which any non-compliance may have on the useful operating life of the asset concerned.
15DEFERRED MAINTENANCE
15.1 If there is material variation between the actual maintenance expenses incurred and the expenses reasonably envisaged in the approved maintenance plan for any infrastructure asset, the Chief Financial Officer shall disclose the extent of and possible implications of such deferred maintenance in an appropriate note to the financial statements. Such note shall also indicate any plans which the Council of the Municipality has approved in order to redress such deferral of the maintenance requirements concerned.
15.2 If no such plans have been formulated or are likely to be implemented, the Chief Financial Officer shall redetermine the useful operating life of the fixed asset in question, if necessary in consultation with the Head of Department controlling or using such asset, and shall recalculate the annual depreciation expenses accordingly.
16DEPRECIATION OF FIXED ASSETS
16.1Each part of an item of property plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately
16.2The Municipality shall allocate the amount initially recognised in respect of an item of property plant and equipment to its significant parts and depreciates separately each part
16.3Depreciation of an asset begins when it is available for use. Depreciation of an asset ceases when the asset is derecognized. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use and held for disposal unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge can be zero while there is no production.
16.4The depreciation charge for each period shall be recognised in surplus ordeficit unless it is included in the carrying amount of another asset.
16.5Depreciation shall initially be calculated from the day in which the item of property plant and equipment is acquired or in the case of construction works, the day in which the item of plant and equipment is bought into use until the calendar month concerned. There after the depreciation charged shall be calculated monthly and accounted for against the appropriate line item in the Department or Vote in which the asset is used or consumed
16.6Each Head of Department, acting in consultation with the Chief Financial Officer, shall ensure that reasonable budgetary provision is made annually for the depreciation of all applicable fixed assets controlled or used by the Department in question or expected to be so controlled or used during the ensuing financial year.
16.7The residual value and the useful life of an asset shall be reviewed at least at each reporting date and, if expectations differ from previous estimates, the changes shall be accounted for as a change in accounting estimate in accordance with the Standard of GRAP on Accounting Policies, Changes in Accounting Estimate and Errors